Ignore the shutdown

Market Monetarists have a tendency not to get all worked up about fiscal issues. I guess the same goes for the discussion about a possible US government shutdown.

But what is history telling us? Well, it would not be the first time we would have a US government shutdown. Last time it happened was in 1995.

I stole this from Wikipedia:

The United States federal government shutdown of 1995 and 1996 was the result of conflicts between Democratic President Bill Clinton and the Republican Congress over funding for Medicare, education, the environment, and public health in the 1996 federal budget.

The government shut down after Clinton vetoed the spending bill the Republican Party-controlled Congress sent him. The federal government of the United States put non-essential government workers on furlough and suspended non-essential services from November 14 through November 19, 1995 and from December 16, 1995 to January 6, 1996, for a total of 28 days. The major players were President Clinton and Speaker of the U.S. House of Representatives Newt Gingrich.

…A 2010 Congressional Research Service report summarized other details of the 1995-1996 government shutdowns, indicating the shutdown impacted all sectors of the economy. Health and welfare services for military veterans were curtailed; the Centers for Disease Control and Prevention stopped disease surveillance; new clinical research patients were not accepted at the National Institutes of Health; and toxic waste clean-up work at 609 sites was halted. Other impacts included: the closure of 368 National Park sites resulted in the loss of some seven million visitors; 200,000 applications for passports and 20,000 to 30,000 applications for visas by foreigners went unprocessed each day; U.S. tourism and airline industries incurred millions of dollars in losses; more than 20% of federal contracts, representing $3.7 billion in spending, were affected adversely.

It sounds pretty horrible doesn’t it? But now look at how the US stock market performed ahead of, during and after the 1995 government shutdown.

govt shutdown

Are you scared? I am not. If the stock market is up it is normally a pretty good indication that no permanent damage has been done to the economy.

PS If you do not get why I am not scared about this you should take a look at what I said about the “fiscal cliff” a year ago – See for example here. It is all about a rule based monetary policy and the Sumner Critique.

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3 Comments

  1. Kristian

     /  October 1, 2013

    Most economists’ think like you, but a government shutdown where 800.000 employees/people have been send home without pay, can’t be good for consumer confidence or retail sale.

    Another debt limit does not make things much better.

    Don’t you think there is a risk of complacency?

    Best regards Kristian

    Reply
  2. It also won’t be good for the people not being paid – but this tends to be forgotten in all discussions about government shenanigans …

    Reply
  3. Kristian

     /  October 2, 2013

    New York Fed chief William Dudley speaking to an audience at Syracuse Univ., Dudley said that Congressional debate over the federal budget and the debt limit “creates uncertainty about the fiscal outlook and may exert a restraining influence on household and business spending.” In fact, he uses some variation of the phrase “fiscal uncertainty” 5 times in his 4 pages of prepared remarks on national economic conditions.

    Reply

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